The day after tomorrow for public pensions

In the Dec. 23 & 30th issue of the New Yorker, James Surowiecki writes about “deadbeat governments” and public pensions (may be behind the paywall):

Pensions are supposed to be dull and reliable. But they’re now the locus of bruising political battles. . . .

How did states and cities get into this jam? By following Mark Twain’s famous dictum: Never put off till tomorrow what you can do the day after tomorrow. In principle, providing for pensions isn’t difficult: governments set aside money every year to fund them, just as workers contribute a percentage of their salary every year. But that means raising taxes or spending less on things that voters like, so politicians often just let pension contributions slide, passing the bill on to future taxpayers. Politicians are adept at rationalizing such irresponsible behavior. When markets are up and pension funds are flush, they say that there’s no need to add money. When times are bad and tax revenue drops, they say that they can’t afford contributions. . . .

Governments also got in the habit of promising workers higher pensions in the future so that they would accept lower wages in the present. To make matters worse, whenever pension funds looked especially robust public employees lobbied for higher pensions, and politicians were all too willing to grant them. . . .

Governments should live up to their obligations, but we can’t let them make irresponsible promises again. The temptation to defer expenditure is intrinsically hard for politicians to resist. We need reforms to control costs and to insure that governments actually pay their bills. . . .

Surowiecki doesn’t think replacing pensions with 401(k)s is the way to go. But the great advantage to the 401(k) is that although an individual bears more market risk, he is much less exposed to the political risk inherent in the current system. Public employees in places like Detroit are seriously harmed by irresponsible stewardship of their pensions, and the Detroit bankruptcy is showing that pension benefits are not as safe as previously thought.

Surowiecki does endorse requiring governments to make annual pension contributions, just like private companies:

The effects could be interesting: healthier pension funds will make it less likely that retirees will suddenly find themselves out in the cold, but, once states have to be truthful about the cost of public services, they may cut back. Either way, it’s time to end the game of “Enjoy now, pay later.”

Indeed.

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